Why Can't Newspapers Make Money Online?

That’s the question I asked myself the other day as I ran smack up against The Baltimore Sun’s paywall after having reached my 15 page per month (free) limit. I’m not a big reader of the Sun, but I was curious about what people were saying about Gordon Ramsay’s “Kitchen Nightmares” visit to one of our local eateries. I clicked a link on Facebook that was supposed to lead me to a post on the Sun’s food blog when I smacked right into the wall.

Oh well. As much as I liked reading the Sun’s blogs (and their food blog – Baltimore Diner – was by far my favorite), it didn’t take much to find another local foodie blog with the dirt on Chef Ramsay’s “Nightmare”-ish tirades. Curiosity slaked, I surfed on to somewhere else…all the while muttering to myself under my breath about how I was done with the Sun.

And I am. I’d long ago moved on to other venues for my world and national news and the only thing that’d kept me coming back to the online edition of my local paper was its collection of blogs. But now that the paywall was up, what was the point? It wasn’t worth $2.50/week to me to read the Sun blogs when there were plenty of other local (and free) alternatives. Besides, the comments on the posts were half the reason I read them – Baltimoreans can be a contentious and entertaining lot when it comes to debating local issues – and I was sure that now that the wall was up the local commenters I’d love to spar with would move on to free-er pastures. And with many laid-off local reporters moving on to new (and better) local sites such as the excellent Baltimore Brew, what was left for me to read?

Of course, the Sun’s not the only paper to throw up paywalls over the past year. The New York Times re-implemented its paywall in March after an earlier failed attempt, but kept it “porous” to readers following links from social media sites. It’s been a fairly successful model, netting almost a quarter of a million paid subscribers in the first three months along with 750,000 print subscribers registering for access and about 57,000 tablet users signing up to read the Times. Others such as London’s Times haven’t fared so well .

But what really interested me was why newspapers have had to put paywalls up in the first place. After all, there are plenty of sites making a pretty good living through an advertising-supported model, and according to a recent report from Econsultancy, more than half of online publishers have seen increased revenue since last year. Clearly it’s possible to make money publishing online without charging a subscription fee. So why can’t newspapers with their built-in local audiences, brand recognition, and long-established publishing (and ad sales) infrastructures do the same?

Clearly there are a lot of factors to the problem. Chinese demand for recycled newsprint has caused paper prices to rise more than 20 percent. Gas prices continue to rise, increasing the costs of distribution. Papers around the country continue to lay off workers. And – no big surprise to any of us in the online advertising biz – the share of dollars going to digital media continues to rise.

But shouldn’t the shift to digital be good for the online editions of newspapers? At first glance it seems like it should: online newspaper readership seems to be increasing. But even though readership may be increasing, a University of Missouri study found that 50 percent of newspapers derive only 9 percent of their revenue from online editions. What the heck’s the problem?

The answer, it turns out, may just be that newspaper advertising costs too darn much.

According to this analysis by comScore, the average CPM for online advertising is $2.52. Social media – by far the hottest and one of the most effective and targetable categories – CPM rates come in at $0.56. Newspapers on the other hand had an average CPM of $6.99…177 percent* greater than the national average for online advertising!

If you look at CPM rates across media (a notoriously-difficult comparison), print newspapers look even worse. According to these 2008 figures from Borrell Associates, which compare local ad costs across all major media, newspaper CPMs come in over $60…almost three times more than primetime broadcast TV, almost six times more than non-premium cable, and around 20 times more than online advertising!

Even if you want to argue about effectiveness, time spent with any one particular medium, response rates, etc., it still seems pretty obvious that the problem with newspapers is that they’ve priced themselves out of the market. Is a newspaper ad 20 times more effective than an online ad? Is it 100 times more effective than an ad placed in social media? Considering the hyper-targeting ability of social media platforms such as Facebook, it seems pretty tough to make the case that it’s worth spending about 100 times more on a newspaper print ad that can’t even tell you whether it’s been read or not.

The bottom line is this: the reason that newspapers can’t make money is because they’re pricing themselves out of the market. It’s true that newspaper circulation has declined due to competition of various new media (check out Newspaper Death Watch if you really want to get depressed), and newspaper ad expenditures have declined along with them since 2001. But the real problem seems to be that newspapers have been way too slow in responding to competitive pressures by lowering their ad rates to a competitive level. Lulled into complacency by decades (if not centuries) of dominating the advertising industry, they’ve failed to recognize that when it comes to advertiser value, they’ve long since fallen from the top spot. The advantages they once had based on geographic exclusivity, readership, and exclusive content have been eliminated by the rise of the web. Today you can get your news from a huge number of sources other than the local bundle of papers tossed on your doorstep; and you (as a consumer) can get it for free. Craigslist and Facebook and Yelp and blogs and job listing sites and myriad other sources of local content have drained away readership and, more importantly, have all but negated the exclusive lock that newspapers used to have on local content. Advertisers who want to reach local audiences now have a huge amount of options and don’t have to be held hostage to the rates newspapers got used to charging.

“News” has now become a commodity, yet the papers continue to charge premium prices. Unless they can figure out how to pare down costs, price themselves competitively, and, more importantly, offer content that’s worth paying for (see The Wall Street Journal), desperation tactics such as paywalls are only going to hasten the inevitable decline.

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An earlier version of this column incorrectly stated the CPM for newspapers was 277 percent greater than online; it is 177 percent.